The IRS, in a recent private letter ruling (PLR 201035003) held that a sale of renewable energy certificates that creates value for the seller is income for tax purposes.
The private letter ruling was requested by a residential owner of renewable energy property that had sold renewable energy certificates to a local utility. Under the taxpayer’s deal with the utility, the taxpayer was required to sell all of the RECs associated with a new solar PV system to the utility in exchange for payments.
The IRS distinguished the utility’s payment for the RECs from indirect subsidies which are exempt from taxation under Section 136 of the Code. Reasoning that the sale of the RECs was like a sale of property, the IRS determined that the gain on the sale would be taxable as income to the taxpayer.
After the House and Senate passed bills including an extension of the alternative fuel mixture and biodiesel tax credit program, alternative fuel producers assumed that Congress would act quickly to put the legislation into a form that could be signed by the President.
It has been more than two weeks now, however, and still Congress has not reconciled the two bills.
House Ways and Means Committee Chairman Sander Levin (D-Mich.) is quoted by BNA Daily Tax Reports (March 23) to say that if lawmakers must hold a formal conference committee to settle differences on legislation extending expired and expiring tax cuts, it could be a long time before a compromise is reached.
Levin’s comments came the day after he told the House Rules Committee that it is “uncertain” when the House will consider the $31 billion extenders package (H.R. 4213), telling that panel the Senate-passed legislation has “many other provisions in it we need to consider within the committee and I’m thinking we’re going to have a conference committee and if we do I think the likely result is it will take considerable time to complete it.”
According to Levin, the House and the Senate used different offsets to pay for AFM and biodiesel tax cuts that expired December 31, 2009.
Until the bills are reconciled and signed by the President, the AFM and biodiesel tax credit remain in abeyance and the alternative fuel industry remains in limbo.
Blue Fire Ethanol and a consortium of 31 other alternative fuel producers have sent a letter to Congress asking for a 30% investment tax credit for biofuels. While alternative fuel producers were encouraged by last week’s passage of extenders legislation to extend the alternative fuel mixture and biodiesel excise tax credit programs, those extentions are temporary.
While the national renewable fuels standard contemplates increasing amounts of biofuels by 2010, there are no commercial scale cellulosic ethanol plants schedule to come online before 2011, according to one industry letter sent to Congress.
The U.S. Senate yesterday voted by a margin of 82-36 to pass the American Workers, State and Business Relief Act, which included H.R. 4213. That bill includes a one year extension of the biodiesel excise tax credit and the alternative fuel mixture credit.
Producers reacted with a sign of relief and reportedly have re-commenced or ramped up production in response to the news.
For more background on the biodiesel and alternative fuel excise tax credits, please check out our recent podcast on Lexis-Nexis.
On Friday, March 5, 2010, Senate Majority Leader Harry Reid (D. NV) filed a motion for cloture on H.R. 4213, the House tax extenders bill, which includes an extension of the biodiesel tax credit and alternative fuel mixture tax credit programs through December 31, 2010.
The Senate is expected to vote on the full bill in the coming week.
Iowa Senator Charles Grassley, one of the sponsor of the Biodiesel Tax Credit Reform and Extension Act, is continuing to push for the Senate to act on the bill before the end of the year. Existing tax credit programs for biofuels expire at the end of 2009 unless Congress acts.
Grassley has said that the bill, along with other matters, is being pushed back as the Senate’s time is absorbed with the debate over health care. Grassley said that he opposed simply extending the tax for another year because that could create a “legislative deadlock.”
Clean tech and renewable energy companies in the U.S. are scrambling to complete their applications for qualified advanced energy project tax credits (Section 48C). Preliminary applications are due September 16 and final applications are due October 16.
When the dust settles, though, the lucky few who are certified for the 30% tax credit will need to find a way to convert the tax credit to cash in order to finance their projects.
My colleagues Greg Sanderson and Aaron Kowan recently spoke in a webinar on the subject and you can find the complete slide presentation on our Research page.
Section 48C credits are available to the owners of qualified advanced energy projects (“QAEP”) that are approved by the Department of Energy and certified by the Department of Treasury. QAEPs will be projects that will manufacture “advanced energy property” which is defined to include property that either produces energy, blends or refines renewable fuels or reduces greenhouse gas emissions.
Most strategies to monetize tax credits involve the exchange of a limited partnership or limited liability company membership interest for cash, pursuant to a partnership agreement (or limited liability company operating agreement) that allocates the benefits of the tax credits to the investor.
Our weekly compilation of renewable energy news and information from around the Web.
Qualified Advanced Energy Project Tax Credits
We covered the DOE’s guidance on QAEP (or Section 48C) tax credits and the application process now under way. (Refer to our white paper for details on the application process). We’re working on a free webinar on the topic on September 2, 2009.
Solar Loses Some Shine
The Wall Street Journal reported on slumping sales at a number of solar companies due to the global recession. It reported that the expiration of an incentive program in Spain also accounted for a dramatic drop-off in solar sales in that country. In 2008, the WSJ reported, “Spain accounted for more than 40% of all new solar panel installation globally, installing 2.7 gigawatts — five times the 2007 figure — out of a global total of 5.6 gigawatts. According to Spain’s photovoltaic industry association, Asif, the country’s market was worth €16.38 billion ($23.24 billion). This year, with cuts to aid and a more complicated application process, there has been no new installation in Spain.”
The slump in global sales, however, has not reduced the marketing emphasis given to solar efforts, however, in the U.S. with Baker Roofing, Inc., one of the largest roofing companies in the U.S., announcing its formation of a “green” subsidiary that will focus on roof-top gardens and roof-top solar. The company, based in Raleigh, NC, has completed a number of installations in 2009 and has a glitzy, separate website devoted to its green efforts.
Pending Legislation
When Congress returns from its Summer recess on September 8th it has alot of work to do. There are at least three bills of keen interest to the renewable energy community, including:
* The Biodiesel Tax Incentive Reform and Extension Act;
* The American Renewable Energy Act; and
* The Cleaner, Secure, Affordable Thermal Energy Act.
The Biodiesel Tax Incentive Reform and Extension Act is an attempt to circumvent the “black liquor” controversy by converting the existing blender’s tax credit into a $1/gallon ethanol producer’s credit. As previously reported, however, the bill would do nothing to extend the existing non-biodiesel alternative fuel producer’s credit that expires at the end of 2009.
The American Renewable Energy Act would require 25% of all U.S. electric production to come from renewable sources by the year 2025, while the Cleaner, Secure, Affordable Thermal Energy Act would create tax credit incentives for both residential taxpayers and business taxpayers who converted heating oil furnaces into natural gas or biomass-burning furnacts. You can follow pending legislation in the renewable energy space here.
Lowering Costs for Cellulosic Ethanol
Corn-based ethanol producers are finding the times tough. A relatively low-priced oil market has kept gasoline below $3/gallon and margins are thin. Cellulosic ethanol producers have found it hard to attract the capital needed to build production-scale plants.
A new producer in Connecticut is planning a 15 MgY plant at a production cost of less than $1 per gallon.
Connecticut-based American Energy Enterprises Inc. plans to construct a commercial-scale ethanol production facility in New Milford, Conn., and according to company chairman Christopher Brown, will use wood waste to produce ethanol at a cost of 80 to 85 cents per gallon. The plant is expected to begin production in mid-2010 and will initially produce up to 15 MMgy. Once production commences, units will be added monthly to increase capacity until the plant reaches its full capacity of 80 MMgy to 100 MMgy.
A contributing factor to the company’s low production cost is its plan to acquire feedstock at no cost or, in some cases, at a profit. Brown said that tipping fees for wood waste at landfills and wood chip companies in the region range up to $60 per ton. American Energy will offer lower fees or take the wood waste for free. “We’re in good shape with the municipalities, the local tree groomers and handlers of that material, and some of the waste companies,” he said, adding that contracts are in place to supply the plant with triple its need for feedstock for the first five years. Brown said the option to ship feedstock by rail to the facility from over 100 miles away is available, but so far, the 1 million tons of feedstock required annually can be acquired from within a 15-mile radius of the plant.
Meanwhile, another struggling cellulosic ethanol project in Pike County, Kentucky, believes its one step closer to its $200 million target to break ground on a waste-to-ethanol plant there under the guidance of Agresti Biofuels. Project sponsors are now said to be looking for private financing to fill out the needed funding.
The Departmetnt of Energy announced recently more than $2 billion in tax credits for “qualified advanced energy projects.”
“This program will help encourage innovation in design of clean energy technologies,” said Treasury Secretary Tim Geithner. “This partnership between Treasury and Energy adds an important new dimension to the incentives created in the Recovery Act to increase US manufacturing output, improve energy efficiency, and develop alternative sources of energy.”
The Recovery Act created a new tax credit program by authorizing Treasury to provide developers with an investment tax credit of 30 percent for facilities that manufacture particular types of energy equipment. Qualifying manufactures will produce solar, wind, and geothermal energy equipment; fuel cells, microturbines, and batteries; electric cars; electric grids to support the transmission of renewable energy; energy conservation technologies; and equipment that captures and sequesters carbon dioxide or reduces greenhouse gas emissions.
Said Energy Secretary Steven Chu: “These tax credits will help create thousands of high quality manufacturing jobs in some of the highest growth segments of the economy. This is an opportunity to develop our global leadership in clean energy manufacturing and build a secure, sustained base of jobs for America’s workers.”
The DOE has devoted a page on their website to a description of the Section 48C tax credits.
Applications for the QAEP credits are due by September 16, 2009. (Click here for guidance on the application process).
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